" . , . .. ..--~ 4 ~u7”““ / " / .«--—a«* ,9 VA, ——. '~1-1:.‘ '. =77‘ *._, fig . -5.?’ J ‘ Q. yr‘:/. i V I - E .‘- :4‘ A _~.,f|_l? O-A. \,:_w., H, _: «:3 3,: 1 .,yr ._r__'; #3:! _, : _ If ,. ~ .. /I I 1 _,,,4* f ‘ii: :.:4}:;)‘ 5} R .1: V:_‘§“_:~p 1;’-_~Q__H¢g _, ”/(A: ' I /‘,7 “’ I A’ " ' ‘ >. gr .26.:-Ms kw -— /,’ I? A ‘I . ~ 1 I 8 816 -‘*1’? W... «— I » .’ 9 7- EPW \,r“'l~ ‘. {vi » '? '1-*1 A: Jr" “)4 "3. '; “EVE? &I’ ELMFE fl «L " 1;’:-, "'.* 7:1 '1--. z’ ‘n "' J - H _ ..,_ -,__ ) I . > .2 vi . ‘ I/' #1 A" ‘V’, :' - ’,«‘ ' i, ‘ “ s ‘R F - E <;. ; .« A. . A - Government Publications Unit‘ ' : AUG 171994 Washington University Libraries St. Louis, MD; 63130 CRS REPORT FOR CONGRESS RURAL HOSPITALS UNDER MEDICARE'S PROSPECTIVE PAYMENT SYSTEM AND THE OMNIBUS BUDGET RECONCILIATION ACT OF 1986 (P.L. 99-509) — T Joseph A. Cislowski Analyst in Social Legislation and Janet P. Lundy Specialist in Social Legislation Education and Public Welfare Division T October 8, 1987A CONGRESSIONAL RESEARCH SERVICE THE LIBRARY I niversi ‘I\|Ii’issouri Columlflia H ‘Ill! 03939810 IT of lllllll -1 OF CONGRESS \ . v J 010 ‘ . "fieilongressional Research Service works exclusively for the Congress, conducting research, analyzing legislation, and providing information at the request of committees, Mem- bers, and their staffs. The Service makes such research available, without parti- san bias, in many forms including studies, reports, compila- tions, digests, and background briefings. Upon request, CRS assists committees in analyzing legislative proposals and issues, and in assessing the possible effects of these proposals and their alternatives. The Service’s senior specialists and subject analysts are also available for personal consultations in their respective fields of expertise. ABSTRACT The Omnibus Budget Reconciliation Act of 1986 (P.L. 99-509) made several changes Ix) Medicare's prospective payment system (PPS) which affected rural hospitals. This paper provides background on rural hospital issues under PPS including 21 summary (H? the provisions of P.L. 99-S09 which were designed to have an impact on rural hospitals. CRS-v CONTENTS ABSTRACT................................................................... 111 INTRODUCTION..........................................;.................... 1 I. URBAN/RURAL PAYMENT DIFFERENTIAL.................................... 3 II. WAGE INDEX.......................................................... 5 III. REFERRAL CENTERS.................................................... 7 IV. SOLE COMMUNITY HOSPITALS............................................ 11 V. OUTLIER PAYMENTS.................................................... 15 VI. DISCHARGE-WEIGHTED AVERAGE.......................................... 17 VII. PAYMENTS TO LARGE RURAL HOSPITALS SERVING A DISPROPORTIONATE PATIENTSCOOOOOCOCCOCOIOOOOOOOOOOOOOOOOOOOOOOCOOO VIII. PERIODIC INTERIM PAYMENTS AND PROMPT PAYMENT........................ 21 RURAL HOSPITALS UNDER MEDICARE'S PROSPECTIVE PAYMENT SYSTEM AND THE OMNIBUS BUDGET RECONCILIATION ACT OF 1986 (P.L. 99-509) INTRODUCTION The Omnibus Budget Reconciliation Act of 1986 (P.L. 99-S09) made several changes Ix) Medicare's prospective payment system (PPS) which affected rural hospitals. This paper provides background on rural hospital issues under PPS including 21 summary (H? the provisions of P.L. 99-S09 which were designed to —have an impact on rural hospitals. For information on general PPS issues, including rural issues, see Medicare: Prospective Emyments for Inpatient Hospital Services (CRS Issue Brief IB87180). For further information on PPS and rural hospitals, see Rural Hospitals and Medicare's Prospective Payment System (available from CRS and printed in the Senate Finance hearing titled, Examination of Rural Hospitals Under the Medicare Program (May 9, 1986). Medicare payments for inpatient hospital care are made according to the Prospective Payment System (PPS) as «established. by P.L. 98-21, the Social Security Amendments of 1983. Medicare-eligible hospital inpatients are classified into (Hue of 471 diagnosis-related. groups (DRGS) based on their diagnosis. Medicare pays the hospital a predetermined rate based on the patient's DRG classification. During a 4-year transition period, a decreasing share of DRG payments is based on hospital historical costs, and an increasing share is based on Federal DRG rates. A decreasing share of the Federal rates CRS-2 is based on regional rates, and an increasing share is based on national DRC rates. A number of PPS features, described below, have been identified as having an impact on rural hospitals including the urban/rural DRC payment differ- ential, the wage index, special payments for referral centers, and special payments for sole community hospitals. CRS-3 I. URBAN/RURAL PAYMENT DIFFERENTIAL In the legislation authorizing PPS, Congress specified that hospitals in urban. areas would. be ‘paid different ‘rates from lmospitals located ix: rural areas. Urban areas are defined as those located in what is known as a metropolitan statistical area, cnr MSA, which is 21 geographic classification systan maintained by the Office of Management and Budget (OMB). Since the costs of urban hospitals are generally higher than those of rural hospitals, the lmfll rates for urban hospitals are currently from 2 tn) 25 percent higher than those for rural hospitals. The Secretary was required to submit a report to Congress by the end of 1985 on the feasibility of eliminating or phasing out the separate urban and rural rates (this report has not been submitted). Many rural hospitals believe they are being underpaid by the Medicare program because of the urban/rural distinction in the payment rates. They argue that they do not necessarily pay less than urban hospitals for the goods and services they purchase; they may actually pay more because they need to compete with nearby urban areas to attract personnel. The rural hospitals also argue that their fixed costs are sometimes greater than in urban hospitals since they must maintain certain services even though the demand (and thus the payment) for such services may fluctuate. Several changes made by P.L. 99-509, discussed in detail later in this paper, were designed to reduce some of the payment differentials between urban and rural hospitals. CRS-5 II. WAGE INDEX The Federal portion of the DRG rates is adjusted by a wage index to re- flect the hospital wage level in a hospital's geographic area relative to the national average hospital wage level. Urban labor market areas are defined by the metropolitan statistical area (MSA) system. A single rural labor market area is defined for each State, which includes the counties in the State that are not located in an MSA. Wage index values are currently based on data for hospital cost reporting periods ending in 1982. These methods and data may produce distortions in the payment adjustments provided by the wage index. MSA boundaries used to define labor market areas sometimes group together hospitals which may actually’ have different wage rates; for example, a hospital in a central city area with high poverty and crime rates may need to pay higher wages than others in its MSA in order to attract and retain employees. In other cases, the MSA boundaries exclude hospitals which face the same labor market conditions as those inside the MSA. Rural hospitals with higher wages relative to other rural hospitals in their State object to the use of a single rural labor market area in each State. Another distortion may occur because the area and national average wage values are calculated. without controlling, for differences among hospitals’ occupational mix. As a result, wage index values may not accurately represent the actual relative levels of wage rates across different areas. CRS-6 Some analysts question the accuracy of basing the wage index on old (1982) data with no provision for updating that data. CRS-7 III. REFERRAL CENTERS P.L. 98-21 required the HHS Secretary to provide for exceptions and ad- justments to the DRG payment amounts as he or she deems appropriate to account for the special needs of referral centers. Congress decided that referral centers should. be paid prospective payments based. on the applicable urban payment rates rather than the rural rates (as adjusted by the hospital's area wage index) because these hospitals attract patients referred from a wide geo- graphic area because of their broad range of specialized services. Congress originally left the definition of such centers and the nature of their payment system to the Department of Health and Human Services (HHS). The Department limited the definition of referral centers to rural hospitals which met a set of detailed criteria based on bed size, location, case-mix, admission volume, and patient referrals. Rural hospital administrators argued that the criteria HHS used to classify hospitals as referral centers were too restrictive. Because updated data showed a decline in the volume of Medicare discharges, Congress and HHS modified the referral center criteria. P.L. 99- 272 reduced the requirement that a hospital have at least 6,000 or more discharges a year to 3,000, but only for osteopathic hospitals. A final rule published in the Federal Register on September 3, 1986 (51 FR 31454) reduced the requirement for all other hospitals to 5,369 (or a number at least equal to a specific number of discharges calculated for each census region). CRS-8 P.L. 99-509 reduced the discharge requirement further to 5,000 (or a num- ber at least equal to a specific number of discharges calculated for each cen- sus region). P.L. 99-509 also specified that teaching hospitals should not be considered when calculating the median case mix for urban hospitals which rural hospitals must match in order to qualify as referral centers. Therefore, referral centers are now defined as: (1) rural hospitals having 500 or more beds; (2) rural hospitals having an: least 50 percent of their Medicare patients referred from other hospitals or from physicians not on the hospital's staff, at least 60 percent of their Medicare patients residing more than 25 miles from the hospital, and at least 60 percent furnished to Medicare beneficiaries are furnished to those who live 25 miles or more from the hospital; or (3) rural hospitals meeting the following criteria for hospital cost reporting periods beginning on or after October 1, 1985: (a) a case mix index equal to or greater than the national case mix index, or the median case mix for urban hospitals located in the same census region (excluding hospitals with approved teaching programs); (b) a minimum number of discharges equal to the lesser of either 5,000 the (national discharge. criterion, or 3,000 in the case of osteopathic hospitals), or the median number of discharges in urban hospitals for the region in which the hospital is located; and (c) at least cnua of the following three criteria: nmre than 50 percent of the hospital's medical staff are specialists, at least 60 percent of discharges are for inpatients who reside more than 25 Iniles from the hospital, at least 40 percent of inpatients treated at the hospital have been referred either from physicians not on the hospital's staff or from other hospitals. Under the regulations, once a hospital achieved referral center status, it was paid at the applicable urban ‘rate for 21 3-year period. .P.L. 99-509 permitted hospitals designated as regional referral centers as of October 21, 1986 to continue their designations for 3 additional years (for cost reporting periods beginning before October 1, 1989). CRS-9 P.L. 99-509 required the Secretary to conduct a rural secondary specialty center demonstration at Lake Region Hospital and Nursing Home in Fergus Falls, Minnesota. CRS-ll IV. SOLE COMMUNITY HOSPITALS In the Social Security Amendments of 1983 (P.L. 98-21), Congress sought to protect isolated hospitals, known as "sole community hospitals," from excessive financial risk by requiring that a special payment methodology be applied. Provisions for sole community hospitals--defined as hospitals that by reason of factors such as isolated location, weather conditions, travel conditions, or absence of other hospitals are the sole source of inpatient hospital services reasonable available in a geographic area--were included to protect hospitals whose closure could harm it's community's access to health care. Hospitals which apply for and receive sole community hospital (SCH) status are generally small, isolated rural hospitals. Such hospitals are paid on a combination of 75 percent hospital-specific and 25 percent Federal rates. They are exempt from current reductions in payments for capital-related costs and from inclusion of capital in the PPS rates (for cost reporting periods beginning before October 1, 1990), and are eligible for a payment adjustment if their discharges decline more than 5 percent over the preceding cost period due to factors beyond their control. The Department of Health and Human Services defines a sole community hospital as one located in a rural area and meeting one of the following three conditions: (1) It is located more than 50 miles from a similar hospital; CRS-12 (2) it is located between 25 and 50 miles from a similar hospital and meets one of the following criteria: (a) it is the exclusive provider of services to at least 75 percent of the residents (or if data on general resident utilization are not available at least 75 percent of the Medicare beneficiaries) in the hospi- tal's service area; (b) it has less than 50 beds and the PRC or intermediary certifies that the hospital would have met the exclusive provider criteria were it not for the fact that some beneficiaries or residents were forced to seek care outside the service area due to the un- availability of necessary specialty services in the area, or (C) it is isolated from similar hospitals for at least 1 month a year because of local topography or periods of prolonged severe weather conditions; or (3) it is located between 15 and 25 miles from a similar hospital but it is isolated from similar hospitals for at least 1 month a year because of local topography or periods of prolonged severe weather condition. A number of rural hospitals that might qualify for SCH status (and thus for the favorable capital and volume reduction provisions) do not apply because their low costs make payment under the national payment rates more attractive than under the 75 percent hospital-specific and 25 percent Federal payment rates. For example, a hospital whose regional DRG rate is lower than its hospital specific rate may choose not to apply for SCH status. Rural hospitals have criticized the restrictive criteria used by HHS to determine whether a SCH is eligible for the volume adjustment. The policy issue with regard to PPS payments for these small, rural hospitals is how to assure access to hospital services for Medicare beneficiaries in rural areas without the Medicare program necessarily guaranteeing the solvency of every rural hospital. P.L. 99-509 extended the additional payment to SCHs that experience a 5 percent decrease in volume for 2 additional years (until cost reporting periods which begin before October 1, 1988). The Secretary is required to report to CRS-13 Congress no later than January 1, 1987 on the impact of outlier and patient transfer policies on SCHs. P.L. 99-509 exempted SCHs from capital-related payment reductions which apply to other hospitals for a period of 3 years. If not for this exemption, the reduction in PPS payment amounts for capital-related costs which P.L. 99- 509 applies to all other hospitals--3.5 percent for portions of cost reporting periods in FY 1987, 7 percent for FY 1988, and 10 percent for FY 1989--would apply to these hospitals as well. SCHs are also exempt if a PPS for capital costs is provided by the Secretary through regulation for cost reporting periods beginning before October 1, 1990. Capital-related costs (including depreciation, leases and rentals, interest, and 21 separate return (nu equity payment for proprietary hospitals) are excluded from PPS at least until October 1, 1987 znui are paid for (M1 a reasonable cost basis (i.e., the hospital's actual capital costs multiplied by Medicare's share of total hospital inpatients). CRS-15 V. OUTLIER PAYMENTS Under PPS, additional amounts are paid to hospitals for outliers--cases with very long lengths of stay or extraordinarily high costs compared to most other patients classified in the same DRG. P.L. 98-21 required that total outlier payments to all PPS hospitals be not less than 5 percent nor more than 6 percent of the total estimated Medicare prospective payments based on the DRG payment rates for the fiscal year. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA, P.L. 99-272) required the Secretary to report to Congress no later than January 1, 1987 on the impact of outlier and patient transfer policies on rural hospitals (particularly on rural hospitals with fewer than 100 beds). This report has not yet been submitted. Many hospitals, urban as well as rural, argued that the outlier payments were not adequate to cover the cost of care for unusually expensive patients. They also argued that the criteria used to qualify for outlier payments were too restrictive and that using length of stay an; the primary criterion for determining the outlier payment may provide a lesser payment than using the cost criteria. Rural hospitals argued that problems with the outlier payment methodology may affect them more than urban hospitals because their often precarious financial status may take them less able to absorb any financial losses from outlier payments that do not cover their costs. CRS-16 P.L. 99-509 established ea separate urban and separate rural set-aside factor for outliers, effective October 1, 1986. The Federal DRG payment amount for each hospital group (i.e., urban hospitals and rural hospitals) would be reduced 137 the amount necessary to offset the projected outlier payments to that group in the forthcoming fiscal year. P.L. 99-509 requires the Secretary to report to Congress no later than January 1, 1987 on the impact of outlier and patient transfer policies on sole community hospitals. CRS-17 VI. DISCHARGE-WEIGHTED AVERAGE During a 4-year transition period, PPS hospitals are paid, in part, on the basis of Federal regional and national standardized amounts per discharge. The law requires the calculation of separate urban and rural standardized amounts for each of the nine census regions and for the nation. These standardized amounts represent the operating cost per discharge in the base year (1981) averaged across all hospitals in the region (or nation) and updated to the year of payment. The original method of calculating the standardized amounts weighted each hospital in the set (e.g., all urban or rural hospitals in a region) equally. They were calculated by summing the average cost per discharge for each hospital and then dividing by the total number of hospitals. Under this "hospital weighted" method, the operating cost per discharge for 21 hospital with one Medicare discharge has the same impact on the average as the cost per discharge for a hospital with 5,000 Medicare discharges. The hospital weighing method contributed to the differences in payment between urban and rural hospitals. P.L. 99-509 revised the methodology for computing the urban and rural averages, effective October 1, 1987. In the ‘revised "discharge weighted" method, the standardized amounts are calculated by multiplying each hospital's cost per discharge by the total number of its Medicare discharges; the sum of these products is then divided by the total number of Medicare discharges. CRS-18 This change in methodology was designed to reduce the differences in payment between urban and rural hospital payments. CRS-19 VII. PAYMENTS TO LARGE RURAL HOSPITALS SERVING A DISPROPORTIONATE SHARE OF LOW-INCOME PATIENTS The COBRA of 1985 (P.L. 99-272) provided that additional payments would be made--for discharges occurring on or after May 1, 1986 but before October 1, 1988--to PPS hospitals that serve 21 disproportionate share of low income- patients. Some observers have argued that factors associated with the provision of care to low-income patients may increase hospitals’ costs--costs which PPS may not otherwise account for. Factors hypothesized to increase cost include greater medical needs of low-income patients (i.e., higher severity of illness within DRGs and greater likelihood of complicating conditions, such as alcoholism), greater patient need for social services (i.e., counseling, foreign language translation, and discharge planning), and additional cost associated with the location of disproportionate share hospitals in low-income urban centers (i.e., higher security costs, insurance, and wages). P.L. 99-272 established the following threshold percentages for disproportionate share hospitals: (1) For urban hospitals with 100 or more beds having a percentage of low-income patients of at least 15 percent, the Federal portion of the PPS payment is increased by 2.5 percent plus half the difference between 15 percent and the hospital's percentage of low-income patients, not to exceed 15 percent. (2) For urban hospitals with fewer than 100 beds having a percentage of low-income patients of at least 40 percent, the Federal portion of the PPS payment is increased by 5 percent. CRS-20 (3) For rural hospitals having a percentage of low=income patients of at least 45 percent, the Federal portion of the PPS payment is increased by 4 percent. The percentage of low-income patients is defined as the hospital's total number of Medicare-covered inpatient days attributable to Medicare patients who are eligible for Federal Supplemental Security Income benefits, divided by the total number of Medicare-covered patient days divided by the hospital's total patient days. Payments are also made to urban hospitals with 100 or more beds which demonstrate that more than 30 percent of their inpatient revenues are derived from State and local government payments for indigent care (excluding payments from Medicare and Medicaid). P.L. 99-509 allowed the Secretary, effective with discharges occurring on or after October 1, 1986, to establish a separate threshold percentage of low- income patients required for rural hospitals with 500 or more beds to qualify for disproportionate share payments. These hospitals would have the Federal portion of tflma PPS payment increased by the same formula currently used for urban hospitals with 100 or more beds (2.5 percent plus half the difference between 15 percent and the hospital's percentage of low-income patients, not to exceed 15 percent). P.L. 99-509 also continued payment to disproportionate share hospitals for 1 additional year (i.e., for discharges occurring before October 1, 1989). CRS-21 VIII. PERIODIC INTERIM PAYMENTS AND PROMPT PAYMENT _ Before the passage of P.L. 99-509, the Health Care Financing Administra- tion (HCFA) issued guidelines, for FY 1987 and thereafter, requiring each part A intermediary and part B carrier to process at least 95 percent of "clean" Medicare claims within 27 days of receipt. "Clean" Medicare claims are those that have no defect or impropriety (including any lack of any required substantiating documentation) or particular circumstance requiring special treatment that prevents timely payment from being made. The guidelines applied to Medicare claims submitted by’ beneficiaries, physicians, providers, and suppliers. I P.L. 99-509 required 95 percent of "clean" claims submitted for part A services to be paid within 30 calendar days in FY 1987, 26 days in FY 1988, for 25 days in FY 1989, and 24 days in FY 1990 and thereafter. If payment is not made for these part A claims by the applicable number of days after the date on which a clean claim is received, interest is required to be paid beginning on the day after the date on which payment was due, and ending on the date payment is made. Before the passage of P.L. 99-509, regulations allowed hospitals, skilled nursing facilities, and home health agencies which met certain requirements to receive Medicare periodic interim payments (PIP) every 2 weeks, based on esti- mated annual costs, rather than. waiting for the processing of individual claims, which may be subject to delays. At the end of the year, a settlement CRS-22 was made. In final regulations published on August 15, 1986, HHS planned to eliminate PIP for most PPS hospitals, effective July 1, 1987. P.L. 99-S09 eliminated PIP for most PPS hospitals. Those still eligible for PIP include PPS hospitals (and psychiatric and rehabilitation units of hospitals) that meet the following requirements: (1) PPS hospitals with a disproportionate share payment add-on of 5.1 percent or more, and (2) rural PPS hospitals with fewer than 100 beds; if the hospital received PIP payments on June 30, 1987, and under regulations in effect on October 1, 1986 would be eligible to continue to receive PIP. P.L. 99-S09 retained PIP for PPS-exempt hospitals, hospitals participating ix: State reimbursement systems, skilled nursing facilities, home health agencies, and hospices. P.L. 99-S09 authorized the Secretary to make available appropriate accelerated payments to a PPS hospital which has significant cash flow problems resulting from operations of its intermediary or from unusual circumstances of the hospital's operation. P.L. 99-509 provided that PIP would not be eliminated for hospitals until the intermediary has met the prompt payment standard for 3 consecutive months. PIP would be reinstated for PPS hospitals if the intermediary failed to meet prompt payment standards for 3 consecutive months. WASHINGTON UNIVERSWY sr. LOUIS - MO. .;.——: